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Fred’s sees sales decline in September

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MEMPHIS, Tenn. — Impacted by pricing pressure and pharmacy industry trends, Fred’s Inc. reported decreased revenue and same-store sales for September.

The discount retail and pharmacy chain said Thursday that for the five weeks ended Oct. 1, sales totaled $199.9 million, down 5.5% from $211.4 million a year earlier. Same-store sales fell 4.9% for September, compared with a 4.2% gain in the year-ago period.

Freds Pharmacy_sign closeup“September sales faced a tough year-over-year comparison. The front store also experienced calendar shifts for federal assistance payments, continued substantial reductions in SNAP payments and an increased impact related to competitive pricing strategies, particularly in consumables categories,” Fred’s chief executive officer Michael Bloom said in a statement.

“Retail pharmacy performed consistent with recent trends and continued to be pressured by the shift to 90-day prescriptions,” he explained. “On the other hand, specialty pharmacy — while experiencing low-single-digit negative comparable sales due to an industrywide slowdown in hepatitis C drugs — is continuing its steady consecutive month-over-month growth.”

For the year to date, Fred’s sales are up 0.5% to $1.439 billion from $1.432 billion a year ago. Same-store sales for the year through September dipped 1.5%, compared with a 1.3% uptick in the prior-year period.

“Our key areas of emphasis going forward will be to optimize our store fleet and supply chain, focus on markets where we are strong, and make additional investments in marketing and technology, all to drive growth with discipline. A significant number of our stores are performing well, experiencing positive or at least flat comparable-store sales,” according to Bloom. “We have identified our weaker markets and are working to mitigate their business trends.

“We know we can be the best in the markets we serve, we know our customers’ needs and we know we can deliver access to pharmacy and health care services as well as a broad, value-based assortment of products,” he added. “These are highly differentiating competitive advantages for Fred’s, and we know they resonate with our customers.”

Fred’s reported that its October fiscal month will end on Oct. 29 this year, compared with Oct. 31 last year, and consequently last-minute Halloween sales will fall into the November reporting period. The company said it also plans to host an investor day in New York City Dec. 2.

Deutsche Bank Securities recently upgraded Fred’s shares to hold from sell. “However, we continue to believe the broader slowdown for hepatitis C drugs (60% to 70% of Fred’s specialty business) and the increasingly tough competition in the discounter/dollar store space will cause a slow recovery of margin and comp performance,” DB retail analyst Paul Trussell wrote in a research note this week.

“Management dramatically lowered second-half guidance in August, reflecting the continuation of pharmacy headwinds from generic deflation, reimbursement pressures, and direct and indirect remuneration (DIR) fees, causing valuation to pull back, as the stock has reached levels not witnessed since September 2011,” Trussell said in his report.

Overall, Fred’s has 649 discount general merchandise stores, including 18 franchised stores, and three specialty pharmacy-only locations in 15 Southeastern states. The retailer also has 371 full-service pharmacy departments inside Fred’s stores, including in four franchised locations.

Pharmacy has become the largest component of Fred’s sales mix. For the company’s 2015 fiscal year ended Jan. 30, pharmacy accounted for 50.2% of sales, up from 41.9% in fiscal 2014 and 37.7% in fiscal 2013. Pharmacy sales have climbed as Fred’s has boosted its pharmacy penetration, now at about 57% of its store base, and built up its specialty pharmacy business, led by the company’s acquisition of EntrustRx in April 2015.

About 60 of Fred’s stores are smaller Xpress pharmacy locations, which range from 1,000 to 5,000 square feet versus 14,000 to 16,000 square feet for a Fred’s discount store. The Xpress stores typically come from pharmacy acquisitions and are earmarked for conversion to full-service a Fred’s store when the company obtains a suitable location.

Despite pharmacy industry headwinds, Trussell views Fred’s pharmacy-focused strategy as a positive and has upheld earnings-per-share and price-target forecasts for the company.

“We continue to give Fred’s a slight premium,” he explained in his report, “given new management’s push to move the business toward being a regional pharmacy provider of health care services and away from being a dollar store.”

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